Gibson Energy Inc (TSE:GEI) Refocusing On Core Strength

Gibson Energy Inc (TSE:GEI) Refocusing On Core Strength

Our Conclusion

The decision to accelerate the transition to an infrastructure-focused company may create long-term value, but carries execution risk and results in an elevated payout ratio and no dividend growth for two years. We reiterate our Underperformer rating and $17.50 DCF-based price target.

Implications

The company held an IR day and detailed its strategy to become a growth company in a US$45/Bbl-US$65/Bbl oil price environment. The plan involves several planned asset sales over the next two years in an effort to accelerate the transition to an infrastructure-focused company. Infrastructure assets that do not rely on activity levels or commodity prices understandably attract higher multiples. Including the previously announced planned sale of the U.S. Environmental Services business, the company expects to realize $275MM-$375MM in gross proceeds to be deployed in a continued infrastructure build out. We estimate reasonable multiples on the sales of 4x-7x EBITDA, but with execution risk.

The expected 1-2 additional tanks sanctioned per year are reasonable and unchanged from previous disclosures. This level of investment is in keeping with recent experience and does not require industry volume growth from new projects, but is rather an intensification of storage requirements to deal with wide differentials and tight pipeline capacity.

At the end of 2019, the company will be positioned as an infrastructure company with a payout ratio of 70%-80%, which can achieve about 10% in per-share distributable cash growth. The challenge remains the execution risk and pressure that comes with a high payout ratio. There will also be less upside from commodity prices, which we view as a worthwhile trade off.

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